Housing Market

It was one short week ago that both Australia surprised with hotter than expected inflation (and no rate cut), and a Chinese CPI print that was far above expectations. Yet in confirmation of Dylan Grice's point that when it comes to "inflation targeting" central planners are merely the biggest "fools", this morning we woke to find that the PBOC has cut the Required Reserve Ratio (RRR) by another largely theatrical 50 bps. As a reminder, RRR cuts have very little if any impact, compared to the brute force adjustment that is the interest rate itself. As to what may have precipitated this, the answer is obvious - a collapsing housing market (which fell for the fourth month in a row) as the below chart from Michael McDonough shows, and a Shanghai Composite that just refuses to do anything (see China M1 Hits Bottom, Digs). What will this action do? Hardly much if anything, as this is purely a demonstrative attempt to rekindle animal spirits. However as was noted previously, "The last time they stimulated their CPI was close to 2%. It's 4.5% now, and blipping up." As such, expect the latent pockets of inflation where the fast money still has not even withdrawn from to bubble up promptly. That these "pockets" happen to be food and gold is not unexpected. And speaking of the latter, it is about time China got back into the gold trade prim and proper. At least China has stopped beating around the bush and has now joined the rest of the world in creating the world's biggest shadow liquidity tsunami.

Yesterday, it was Thomas Stolper who capitulated on his latest incursion into the field of 0.000 batting, when he closed his long EURUSD reco (only for the EUR to jump today of course). We can hardly wait for him to announce he is again long the EURUSD for the clearest EUR short signal possible. That said, it still left outstanding the Goldman Russell 2000 recommendation noted here previously. Sure enough, in the aftermath of yesterday's return of risk with a vengeance, Goldman is taking steps to make sure it locks in at least some profits on its RUT 2000 target of 860 by hiking the stop to 810 from 765. The reason? "What has clearly changed in the past week -- and the catalyst for this "leash tightening" -- is that European sovereign risks have reemerged, with continued near-term support for Greece now much more uncertain than we or the markets had previously assumed. With the amplification of these hard-to-assess risks emanating from Europe, and data continuing to support our main thesis, we think that protecting the gains at this point with relatively tight stop is prudent" But why if Europe is suddenly fixed, on the completely meaningless news that the ECB is funding Eurozone central banks with magic money on their Greek bond losses, even as the actual debt notional is not changing at all. At this point, we doubt we are the only one who no longer care.

While one can discuss seasonal factors, such as abnormally warm weather, as a driver of today's beat in Housing Starts, a far less noted number for headline purposes is the other side of the equation - Housing Completions. Because after all, every house that is started has to be completed at some point. One look at the chart below, shows why completions is quietly ignored, as it presents a far less optimistic picture about the housing market. Indeed, printing at 530k seasonally adjusted annualized units, the completions number was just the second lowest in decades, better only than the 509K from January 2011. And where this becomes rather glaring is when looking at the relative, or percentage, spread between Starts and Completions: at 31.9%, this was the highest in, well, as far as our data series goes back to. Does this mean that homebuilders are merely "breaking ground" for book keeping purposes, just to "paint the tape" and then quietly fading away into the night? We will know for sure in February when we get at least one more data print to validate or deny the recent troubling trend, but for the time being, to paraphrase a famous Bill Murray movie, is there something here being "lost in construction?" Or, far more simply, is this merely the latest ploy to paint not the tape so much as the economy in an election year with the latest incarnation of "cash for clunking construction"?

• Europe Demands More Greek Budget Controls in Bid to Forge Rescue (Bloomberg)
• Moody's Warns May Downgrade 17 Global Banks, Securities Firms (Reuters)
• Officials at Fed Split on More Bond Buys (Hilsenrath)
• Greek deal delays pressure periphery (Reuters)
• Talk, but No Action, to Break US Grip on World Bank Job (Reuters)
• Greek Rhetoric Turns Into Battle of Wills (FT)
• Greece Seeks Monday Bailout Deal, EU Questions Remain (Reuters)
• US Lawmakers Announce Payroll Tax-Cut Deal (Reuters)
• China Leader-In-Waiting Xi Woos and Warns US (Reuters)
• China's FDI falls 0.3% in Jan (Reuters)

It was a bad week for freedom loving people, but I believe there are enough patriots left in this country to change our course. We are being buried under a blizzard of lies on a daily basis. We have a choice. We can support the existing corrupt crony capitalist establishment (Obama & Romney) or we can declare war on lies, deceit and misinformation by rallying behind the only person who would truly attempt to reverse decades of corruption, sleaze, incompetence, bloat, debt accumulation, and a warped version of free market capitalism – Ron Paul. He is the only public figure willing to level with the American people and tell them the truth. Will we let the concept of truth fade out of the world? The choice is ours. 

“In our age there is no such thing as ‘keeping out of politics.’ All issues are political issues, and politics itself is a mass of lies, evasions, folly, hatred and schizophrenia. The very concept of objective truth is fading out of the world. Lies will pass into history.” –   George Orwell

No this is not a trick question... well maybe a little. Minutes ago the National Association of Home Builders announced that its Housing Market index soared from 25 to 29, trouncing not only expectations of a 26 print, but just like the Empire Fed, the highest forecast. This was supposedly the highest since May 2007. In other words, everyone is confident, and the commentary is that this print is "reinforcing optimism that the housing market is finding a bottom" and that "this consistency suggests that the housing market is moving toward more sustainable growth." That at least is the spin. Below we show the reality, in the form of the Mortgage Brokers' Association mortgage applications index. We somehow fail to see just where the onslaught of demand for new home loans is, and just where all this optimism comes from.

Just over a week ago we highlighted the desperate plight of cash-strapped California. With a $3.3bn short-term 'hole', they were looking for cash-management solutions under every rock and hard place they could find. Today we hear that California joins the Obama bank foreclosure settlement enabling $18bn of bank-funded cash (implicitly via Federal Reserve/Government coffers) can flow to the left coast. Los Angeles alone will receive $4bn which while eventually wending its way down to the consumer (to be spent and implicitly spurring further economic activity or perhaps more likely to pay down other debt in this balance sheet recessionary environment), as Bloomberg asks, "Why should a taxpayer in Houston or Wichita bail out irresponsible California homeowners, banks and the state’s public employees’ retirement fund?" To add to California's 'aid', BofA has become the first bank to sign up for the 'Keep your Home' program where Federal dollars are given to banks to encourage them to reduce mortgage balances on struggling (over-levered and perhaps once greedy) California homeowners. Certainly it is a happy coincidence that perhaps a short-term cash crisis could be band-aided in the Golden State by this well-timed joining of California to the settlement.

While today's foreclosure settlement deal is by some accounts expected to help the housing market, as the foreclosure pipeline is once again unclogged, it is unclear what this will actually do for price discovery and clearing levels when one considers the already untenable shadow housing inventory, which can be summarized simply as follows - excess supply. It is this overhang that has to clear before there is any hope for incremental demand interest. And since mortgage rates are already at record low levels, and only an MBS QE could do much to stimulate even lower rates (which has its own set of adverse consequences), it is now obvious that from a purely psychological standpoint as long as people expect rates to decline in the future, they will not commit to a new home loan today. What makes it even worse is that the excess inventory has to be literally burned to the ground for regular market clearing to resume. Unfortunately, as the following chart from JPM shows very vividly, the burning will have a long way to go: the most recent shadow housing inventory is now at an all time high. Think today's action will do anything to help the housing market? Think again - if anything it will simply see the number of foreclosed properties explode. Rather, what it will do, is finally redirect discretionary spending from all the squatters who have lived mortgage free in their houses for years back into mandatory spending such as rent and mortgage bills. For those unclear, recall this post quantifying the benefit of the squatter economy (i.e., non paid rental/mortgage payments going into discretionary spending) - kiss that $50 billion inflow into GDP goodbye. Paradoxically, by trying to fix housing, Obama may have just popped the consumer discretionary bubble, of which the biggest beneficiary is that one certain fruit-shaped company...

Remember robosigning and the whole fraudclosure scandal? In a few days you can forget it. Because in America, the cost of contractual rights was just announced, and it is $25 billion: this is the amount of money that banks will pay to settle the fact that for years mortgages were issued and re-issued without proper title and liens on the underlying paper, courtesy of Linda Green et al. Why is this happening? Because staunch hold outs for equitable justice (at least until this point), the AGs of NY and California folded like cheap lawn chairs (we can't wait to find what corner office of Bank of America they end up in), but not before the one and only intervened. From the WSJ: "The Obama administration made a full-court press over the past four days to secure the support of key state attorneys general, including those from Florida, California and New York." Nothing like a little presidential persuasion to help one with overcoming one's conscience. Because in America the push to abrogate the very foundation of contractual agreements comes from the very top. But wait, there's more - just to wash its hands of the guilt associated with this settlement which shows once and for all that the Democratic administration panders as much if not more to the banking syndicate as any republican administration, as it announces one settlement with one hand, with the other the US will sue banks over the mortgage reps and warranties issue covered extensively here, in the most glaringly obtuse way to distract that it is gifting trillions worth of contingent liabilities right back to the banks, not to mention discarding the whole concept of justice. From the WSJ: "Federal securities regulators plan to warn several major banks that they intend to sue them over mortgage-related actions linked to the financial crisis, according to people familiar with the matter. The move would mark a stepped-up regulatory effort to hold Wall Street accountable for its sale of bonds linked to subprime mortgages in 2007 and 2008. At issue is whether the banks misrepresented the poor quality of loan pools they bundled and sold to investors, the people said." Wait, let us guess -that particular lawsuit will end up in a... settlement? Ding ding ding. We have a winner. All today's news succeed in doing is finally wrapping up any and all legal loose ends, so that banks can finally wrap all outstanding litigation overhangs at pennies on the dollar. And if at the end of the day, they find themselves cash strapped, why the US will simply loan them more cash of course.

• Greek Premier to Seek Bailout Consensus Amid Political Quarrels (Bloomberg)
• Merkel makes case for painful reform (FT)
• Bernanke Cites Risks to Progress of Recovery (WSJ)
• Proposed settlement with banks over foreclosure practices dealt a setback (WaPo)
• Merkel Approval in Germany Climbs to Highest Level Since 2009 Re-Election (Bloomberg)
• Francois Hollande will spark next euro crisis (MarketWatch)
• China’s Central Bank Pledges Support for Housing Market (Bloomberg)
• Italy Pushes for Europe Growth Policy (Bloomberg)
• Santorum bounces back in Republican race (FT)
• China 'Big Four' Banks Issued CNY320 Billion New Yuan Loans In Jan (WSJ)
• Gasoline and diesel prices raised (China Daily)

Isn’t it meaningless to look at the inverse floaters in isolation? To assess risk, shouldn’t we look at the entire portfolio held by Freddie Mac?

If last week's tax data is indicative of what's ahead this month, the "good news" won't be sustained.

• Merkel Seeks to Reassure China (FT)
• German-IMF Rift Stalls Greece Deal (WSJ)
• Survey of Banks Shows a Sharp Cut in Lending in Europe (NYT)
• Bernanke to testify on economy and deficit (AP)
• House votes to freeze congressional, federal pay (WaPo)

In the past, when discussing the goalseeking C-grade excel jockeys at the Congressional Budget Office (or CBO), we have not been technically full of reverence. After all when one uses a phrase such as this one: "What do the NAR, Consumer Confidence and CBO forecasts have in common? If you said, "they are all completely worthless" you are absolutely correct", it may be too late to worry about burned bridges. We do have our reasons: as we pointed out last year, following the whole US downgrade fiasco when the Treasury highlighted the CBO's sterling work in presenting a US future so bright, Timmy "TurboTax" G had to wear shades, we said "according to the same CBO back in 2001, net US indebtedness in 2011 would be negative $2.436 trillion, the ratio of debt held by the public to GDP would be 4.8%, total budget surplus would be $889 billion, and GDP would be $16.9 trillion." As we know now they were off only by a modest $17.5 trillion on that debt forecast. Yet we never attributed to malice and bias and outright corruption, what simple stupidity and gross incompetence could easily explain. Until today that is, when following a WSJ article, we are left wondering just how deep does the CBO stench truly go and whether its employees are far more corrupt than merely stupid?

The Case Shillers are shilling that the market is still weakening. But that's just not the Case.